- “We’re Drowning in Liquidity!”

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“We’re Drowning in Liquidity!”

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“We’re Drowning in Liquidity!”

Tuesday, 30 September 2008

By Andrew Gordon
The financial sector continues to bleed out.
Last Friday WaMu finally fell into government hands and their deposits and branches were simultaneously taken over by JP Morgan. Fortress – once a flourishing investment company – just decided that it better keep the $100 million it was going to give its shareholders as a dividend. They get nothing this quarter. And GE suspended its current stock buyback.
The government’s bailout is supposed to revive the patient. The government says it has no choice. Without healthy banks, it says, the economy will spiral into a deep depression.

But that’s a big simplification of what is happening. Only part of the financial sector is on a death watch. The other part is healthy and thriving.

While the big banks concentrate on survival, the small banks are doing better than ever.

The problem with big banks is that they made risky mortgage loans that are worth a fraction of their original value. On the other hand, small banks make few mortgage loans and their lending in the local community is fed by deposits. They’ve mostly avoided the problems which are now plaguing big banks.

And right now, investors are moving their money out of their riskier investments and putting it into these banks – giving them plenty of capital to loan out.

Amazingly enough, some of these banks have price-to-book of less than one. That means they’re going for less than their assets and you get the business for free. That is one heck of a deal.

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